Is Carry Trade Liquidation or Profit Taking?

Carry trade liquidation has been blamed for the weakness in the Yen crosses today, but are the moves really carry trade liquidation or simply profit taking? Sharp intraday reversals in USD/JPY, EUR/JPY, CHF/JPY and GBP/JPY suggest the latter. The stock market has been flipping between positive and negative territory over the past two days, which is indicative of strong two way pressure on equities. So far, the move in the yen crosses fall far short of being labeled a liquidation, we need to see at least a one percent move in all of the currency pairs before becoming worried.

Comments from Japanese officials suggest that they may be facing increased pressure from overseas authorities to stem the slide in the Yen. Now that yen weakness has taken off against the US dollar as well, the Japanese may be feeling the pressure from Washington. Finance Minister Omi said overnight that they are “monitoring the FX markets closely” and that the market should be “aware of the risks of one-way bets.” Over the next few days, we have a tremendous amount of Japanese data due for release including retail sales, industrial production, consumer prices, and the jobless rate. The corporate service price index hit a nine year high in the month of May, which suggests that consumer prices could be firm as well. Before getting too excited, retail sales are up first. Wage growth has been weak so the market is expecting another month of restrained spending in Japan.